We like toin high environments because, in part, we are convinced that when IV is high it will and . Metrics we have created, such as , help us in knowing when IV is high or low and should revert to the mean, but what is that mean?
A graph of the S&P 500 Volatility Index, thewas displayed. The graph showed the 20-day, 50-day and 250-day mean. The graph showed the importance of staying consistent with your discipline and strategy. A second graph comparing the 20-day mean to the 50-day mean of the VIX was displayed. The graph showed that a trader looking at the 50-day mean might think volatility is undervalued while traders looking at the 20-day mean might think it’s overvalued.
So how do we decide which mean should be used when determining whether volatility is expensive or cheap? A graph of mean implied volatility in which a specific trade’swas taken into account was displayed. The graph compared the 1-year moving average to the 45-day moving average. Examples and their formulas for weighting to the short term and long term to establish a mean volatility for reversion was displayed. This can help with consistency and confidence. Establishing a mean volatility can aid traders when choosing between debit and and deciding how aggressive to be when selling premium.
For more information on Mean Reversion see:
From Theory To Practice from February 12, 2016:
Options Jive from May 6, 2016:
Watch this segment of Options Jive withand for the key takeaways and a better understanding of what mean volatility we should use in determining whether implied volatility is high or low.